AXIS, PartnerRe committed on merger. EXOR commits to its offer

4th May 2015 - Author: Artemis

The boards of insurance and reinsurance firms AXIS Capital and PartnerRe have reaffirmed their commitment to complete the merger between the two firms, but EXOR says that it remains committed to its offer which it terms a “superior all-cash” deal for shareholders. Earlier today, AXIS Capital and PartnerRe put out a press release announcing both of their commitments to completing the deal and bringing the two reinsurance firms together to create a larger and more diverse entity.

PartnerRe shareholders now hold all the cards in this deal, being able to choose between the merger with AXIS or the cash deal from EXOR.

In order to sweeten the merger option for PartnerRe shareholders, the announcement from AXIS and PartnerRe’s boards said that the deal will now also include a one-off special cash dividend of $11.50 per share, conditional upon the successful closing of the merger.

It’s no surprise to see an additional bonus for the shareholders, a revised deal was expected from the AXIS-PartnerRe side. It’s designed to sway shareholders to support the merger over the $6.4 billion all-cash bid that came in from EXOR, an investment company owned by the Italian Agnelli family that sees insurance and reinsurance as a diversifying complement to its conglomerate approach.

With the dividend, the merger offer still comes in at a slightly lower valuation than the EXOR bid for the shareholders, which suggests that AXIS and PartnerRe hope that the benefits of the combination of the two firms will outweigh investors desire to get the best possible price.

The original terms of the AXIS Capital – PartnerRe combination remain the same, just with this one-off dividend aiming to sweeten the terms and turn PartnerRe shareholders heads. AXIS and PartnerRe said that “significant progress” has been made on integration planning to date and that they continue to expect to make savings due to synergies.

Of course such synergies and the $200m of savings that have been touted can only ever be proven after the merger takes place. In fact, typically any merging of two companies bring costs in the short-term, with synergies playing out over time.

“The strategic, operational and financial merits of a united PartnerRe and AXIS are significant and will create substantial value for all shareholders, particularly given the operating and capital synergies that can be realized by the combination of our two businesses,” commented Jean-Paul L. Montupet, Chairman of PartnerRe. “We are pleased to be moving ahead with our partner AXIS Capital.”

“AXIS Capital and PartnerRe have already made significant progress toward realizing our shared vision of a broadly diversified global specialty insurance and reinsurance company with the scale, capital and market presence to compete at the highest levels of our industry,” added Albert Benchimol, President and CEO of AXIS Capital. “Throughout this process, we have only grown more confident about the transformational opportunity provided by this merger of equals, and we believe the combination of AXIS Capital and PartnerRe will provide our respective shareholders, clients and brokers with compelling value both now and in the years ahead.”

“Today’s enhanced merger terms make sense for both sets of shareholders,” said Michael A. Butt, Chairman of the Board of AXIS Capital, referring to the new special dividend. “Our merger of equals offers shareholders real and deliverable value, and is based on a compelling strategic rationale.”

“Both companies have a long track record of executing capital management strategies for the benefit of their stakeholders,” said Benchimol. “The special cash dividend announced today does not change our plans to resume share repurchase activities immediately following the closing of the merger. In fact, our intention remains to return the accumulated operating earnings of the combined companies since January 1, 2015 as appropriate and in a manner consistent with past practices.”

EXOR said today that the decision of PartnerRe’s board to commit to the merger shows that it continues to ignore the all-cash offer, which EXOR believes provides superior value to PartnerRe shareholders.

EXOR said that it’s offer is “financially superior, with no financing conditions, can be completed swiftly and will retain and build upon PartnerRe’s highly talented management and employees.”

EXOR explains its rationale, believing that the special dividend offer still undervalues PartnerRe:

The revised terms are a clear admission that the original transaction with AXIS, which was the result of a flawed process, undervalued PartnerRe, as is the case with the revised transaction.

The purported value of the proposed $11.50 extraordinary dividend is misleading. Since PartnerRe shareholders would own approximately 52 percent of a combined PartnerRe/AXIS, the incremental value to the PartnerRe shareholders is less than half of the proposed dividend.

The proposed extraordinary dividend will reduce PartnerRe’s capital by more than $550 million and significantly weaken PartnerRe’s financial strength at a point when both PartnerRe and AXIS have been placed under review with negative implications by A.M. Best. In contrast, EXOR’s all-cash proposal fully preserves PartnerRe’s financial strength, while delivering full and superior value to PartnerRe shareholders.

The PartnerRe transaction with AXIS is the product of a flawed process. No consideration was given by PartnerRe to alternatives when it entered into the original agreement with AXIS, and PartnerRe refused to engage fully with EXOR in response to EXOR’s proposal. After EXOR satisfied clarifying questions from PartnerRe, PartnerRe refused to permit EXOR to conduct due diligence and ceased to engage. The result is another inadequate proposal for PartnerRe.

EXOR notes that PartnerRe shareholders will now have the decision to make which will see what direction this deal takes. It said it remains committed to its offer and a rapid completion of it.

If that fails, meaning that the merger goes ahead and PartnerRe and AXIS become one, it will be interesting to see how EXOR reacts and whether it continues to look to the reinsurance space as attractive to it.

Just how attractive insurance and reinsurance as a diversifying investment is to EXOR we do not yet know. The actions of the firm in the coming days may be telling.